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this podcast is brought to you by
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knowledge at Warton please visit
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knowledge. won. up.edu for more
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information Global automakers especially
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the big three can't seem to catch a
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break first the spike in oil prices last
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spring and summer now the global
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financial crisis is keeping consumers
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out of new car markets worldwide even
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Toyota says its year-over-year sales
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will fall by 2% in 2008 their first
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sales decline in 7 years automakers from
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Emerging Markets such as China's cherry
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and India's Tata whose growth was fueled
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by double digit economic growth now have
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to adjust to much more modest gains the
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picture is particularly gloomy in
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Detroit where compared to the first nine
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months of 2007 sales for the same period
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this year are down 17.1% for Ford 17.4%
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for GM and 25% for Chrysler now GM and
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Chrysler are reported to be running out
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of cash and seeking help from the
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government
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even as they discuss a merger and Kirk
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Koran is unwinding his billion doll
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investment in Ford could the big three
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soon become the big two or less here to
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discuss the near-term future of the Auto
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industry are Wharton management
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professors John Paul McDuffy and Larry
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rinc thanks for joining us professors
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let's let's start in the US are the why
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are the big three in in such a
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jam they've been hit by uh more or less
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the equivalent of a Perfect Storm I
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think between uh being still in the
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midst of uh recovery plan which has
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included things like uh reducing labor
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costs reducing Healthcare and pension
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costs uh trying to shift their product
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line to more fuel efficient vehicles and
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uh oil prices obviously hit them in the
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middle of that and now the financial
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crisis the credit crisis is uh causing
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them to not be able to extend loans to
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car buyers uh they're being hit on all
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fronts looking back to hisor ly uh what
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what John Paul said of course is true I
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would just add that over the years
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probably the last decade or so they made
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a lot of decade and a half a lot of
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strategic mistakes you know basically
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years ago they had a very favorable
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industry structure industry forces were
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positive they had power over suppliers
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they had power over buyers buyers didn't
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know much about buying cars they had
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size they had market share it was an
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oligopoly three firms all of a sudden
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the world changes competition comes in
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the customer gets much more uh
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knowledgeable because of the internet
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suppliers become more powerful the UAW
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had a history of GM of course who bad
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relationships and that's not carrying
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over positively right now and so when
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you put all of that in perspective and
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given what John Paul also said that in
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fact you can see some strategic errors
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and just in inability to manage their
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company well well as we know GM and
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Chrysler are talking about merging with
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each other does that make sense it's
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hard to see much uh strategic rationale
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for it uh Chrysler has access to some
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cash which GM could very much use um
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there's also talk about cus which owns
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Chrysler being able to turn over its uh
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ownership stake in the GMAC the the
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credit arm of GM uh as part of that deal
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everything else which you usually hear
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when there's talk of merger and
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acquisition which is scale economies and
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you know synergies and being able to
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eliminate uh redundance products and
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redundant dealers Etc um to me the the
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administrative effort to do that
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effectively is uh is going to so
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overwhelm these companies at this point
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that it would swamp any benefits I think
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they could get and they've been talking
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about it for some time so despite that
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logic is it likely to turn out that
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we'll have a big two instead of a big
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three and perhaps in the future
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something even less than that yeah I
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would say this is probably going to
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happen I agree that basically
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strategically it doesn't make a lot of
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sense yet I look at the other options
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they have and there aren't that many
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if they do merge with Chrysler they're
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going to need something like $10 billion
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of infused Equity just to pull off the
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integration just to U meld the two
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companies just to do a whole host of
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things there's going to be a bunch of
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layoffs and whatever but I don't know
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what the options are it's going to
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happen I don't think it's a great move
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but it's going to happen I also think
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it's a signal I think even though the
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government has come out and said they're
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thinking of helping them I think they
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want to go through a kind of sequential
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process that says look we've tried to
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solve our problems if we integrate two
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companies now we're really showing we're
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trying our best and if this doesn't work
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we can't have so many people be
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negatively affected in the economy so
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government please step in and help us
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and we've tried hard and so I think
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that's part of it too but strategically
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it uh you know one company has eight or
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n eight Brands the other has three you
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put them together I mean they have
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together we'll have 10,000 uh plants
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that's 10 times more than uh Toyota and
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all of these things put together say
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there's a lot of problems now that 10
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billion they would need to pull that off
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there aren't a lot of lenders lining up
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to provide the cash and so there has
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been talk as you said of going to the
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government for some help today the White
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House said that they would likely
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qualify for the help under the uh the
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tarp program so um uh should the
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government step in should the government
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save
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GM well it's going to be
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politically complicated although at the
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same time there's probably more
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favorable political conditions for such
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an action now than the last time it was
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brought up which was uh less than a year
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ago uh I do think that bankruptcy is
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probably the last option that these
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companies will want to pursue for a
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durable good like a vehicle for a
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company to be in bankruptcy introduces
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so much uncertainty in anyone's purchase
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decision even maintaining of of used
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vehicles uh it's not like an airline we
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we've seen Airlines go into bankruptcy
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sometimes twice and come out and still
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have customers but uh I think the the
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feeling is no one's really tested it uh
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that with a car company it would be very
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different so there's the options of you
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know big mergers there's options of
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smaller things which involve selling off
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chunks of assets Ford may sell off its
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stake in Mazda uh there's talk of you
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know I don't know whether GM could sell
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Hummer in this uh in this circumstance
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but there are things less than the big
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mergers and I think the government which
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has already approved I think it's 25 uh
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uh billion dollars for supporting the
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big three in a conversion to new fuel
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efficient
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Technologies uh is probably ready to do
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more the question would be the
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conditions uh I think Obama has already
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said that he favors another 25 billion
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right away and more dedicated to saving
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jobs so in a funny way the conditions
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are are more favorable but perhaps as
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Larry says there'll be some uh sort of
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necessary steps of consolidation before
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that could happen well certainly the
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development of those um lower emission
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more efficient cars are very important
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for their competition uh in their
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competition against uh uh overseas
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manufacturers um is that going to be
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enough that that kind of government
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assistance uh through the the incentives
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going to be enough to fund that or do
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you think that's it's going to take
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something more it it's going to take I
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think something more uh if if we recall
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GM had a very nice Electric motor
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electric motor car back in the 60s and
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70s and they killed it because of the
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Reliance on gas combustion and they
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basically said no we're not going to do
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this so now of course they're doing it
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because others are forcing them to do it
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whether they can get up to speed and do
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it as quickly and get up there with
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Toyotas and Hondas and so on is yet
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another question should the government
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bail them out I don't think the
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government probably feels they have much
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choice right now because they did all
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this work with the all this help for the
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financial institutions and the argument
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was the pervasiveness of the effects if
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we let them go under would be disastrous
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well the same with General Motors if you
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stop and think with General Motors
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Chrysler and and Ford the number of
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people they affect not only directly in
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terms of employees but suppliers uh
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people who work related Industries the
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multiplier effect of all the
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implications of not helping them uh are
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going to be huge so I feel the
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government's going to feel you know
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we've started the process we've helped
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someone else we're going to have to
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continue I think that's what will happen
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Ford doesn't seem to be in quite so deep
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a hole um why is that Ford mhm um they
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got into a better cash position about a
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year or so ago they have some better
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Brands they do have Volvo they have
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Mazda and uh they did have some
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Resurgence about a year or so ago uh
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after having some pretty down time now
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uh they just moved faster than General
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Motors and Chrysler the fact that
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General Motors first picked forward to
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look at they knew what they were doing
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they were saying if anyone could help us
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it would be Ford more than Chrysler
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quite quite frankly but Ford wasn't
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interested now Ford's in a little bit
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more trouble because even investors
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there are pulling out and selling off
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and so they might not be in as good a
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shape as I thought they were just a few
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months ago but um with their fewer
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Brands and again with Mazda and Volvo
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they could sell those off they could
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keep them I think they're in a little
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better shape again GM has eight major
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brands I mean they're and with Hummer
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and some of the things they in GMC
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trucks which are doing nothing right now
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and I don't think Ford's in that
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position well just last year Ford sold
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its Jaguar Division and um uh to Tata
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Motors uh in India uh which makes me
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wonder they were kind of counting on it
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in tata and and at the at China
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automakers for the really fast growing
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economies that they had over there and
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of course the financial crisis has put
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the breaks on that too what does this
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mean for them well their progress is
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going to be a lot slower I mean let's
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let's face reality that they had counted
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on double digit growth they had
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predicted that they were matter of fact
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Tata was one of the uh companies
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mentioned uh to pick up some assets from
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uh General Motors or or even merge with
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them or buy some of their assets all of
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that I think is going to be put on Beck
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burner the slowdown in the worldwide
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economies the financial crisis uh it's
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going to be it's going to affect Asia
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it's going to affect Europe it's going
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to affect uh us here and I think that
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they're just going to have to bite the
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bullet and uh hopefully things get
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better yeah I I think
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um you know the the Chinese have shown
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some interest in uh buying into
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companies outside of China and and
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starting to get into those markets
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before they would be able to export from
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China directly but um I think that
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they're going to have to keep their
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focus on their domestic markets which
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will be slowed down um Tata has some
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demonstrated capabilities of managing
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these uh sort of high-end brands that
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they've purchased and but most of their
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emphasis is on the the Nano on the
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product they've developed for their own
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domestic market so I expect it to stay
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that way now Toyota is reporting this
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year that they'll have uh their first uh
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decline in sales uh since 2001 uh so I I
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guess this means nobody's immune
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absolutely nobody's immune and uh
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certainly Toyota's decision to invest in
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uh the larger pickups and SUVs you know
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they just redesigned the tundra they
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just launched a brand new plant in Texas
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to build it uh means they've been
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uh with the same kind of steep fall of
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that end of the market but of course
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that's not a big part of Toyota's
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product lineup it's not uh kind of the
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core of its strategy those are unique
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products to the US uh in most of the
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globe they really are leaders in
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fufficient vehicles uh you could perhaps
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argue that Honda has uh the best product
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portfolio for these kinds of conditions
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because they've stayed with a smaller
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number of products and almost all of
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them have uh some drivetrain Innovation
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because that's really the core of Honda
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strategy so perhaps right now they look
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in the best situation but Toyota's cashr
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and they're very flexible and adaptive
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they've already announced that they're
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going to convert an SUV Factory plan for
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Mississippi to build the Prius in the US
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the first country outside of Japan where
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that will be built so I expect that
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they'll do uh just fine what kind of
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time frame do you think we're looking on
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for this uh this this rough patch for
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the for the Auto industry uh will the
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Auto industry emerge from um the uh the
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the financial crisis um kind of behind
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the curve or ahead of the curve and how
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long do you think that might be well I
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think they're currently behind the curve
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pretty badly when you look at worldwide
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sales comparing them to Toyota Honda and
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some of the others uh I think there are
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two questions here number one will they
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emerge and number two how will they
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emerge and when so it's like I think
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even if they do emerge if they get
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through these Financial crises that
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they're going through now if there is
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some sort of of uh what merger
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acquisition activity and whatever you're
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not going to see magical results they're
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going to be behind the curve and they're
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going to have to fight very very hard to
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uh fight the erosion in market share
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fight the increase in cost right now
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General Motors is sp is spending over1
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billion dollars more per month than it's
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bringing in and so even with a uh merger
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an acquisition or whatever we might call
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it with Chrysler and the need for that
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extra 10 billion I don't see things
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turning around very quickly I see them
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really trying to save themselves and to
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answer your question they're going to be
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behind the curve for quite a long time
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quite frankly but do you think they can
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avoid
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bankruptcy they said they were going to
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do it at all costs they said there is no
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option that could just be good talk uh
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quite frankly I'm not sure they can
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avoid bankruptcy but it sounds good what
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they're trying to say to the financial
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markets their potential investors and
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whatever is please don't give up on us
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that in fact we're not going to go
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bankrupt we are going to fight through
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this but I think it's going to be tight
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very close Professor McDuffy are they
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going to make it I mean there really are
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two Auto Industries in the US by now
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there are the us-owned companies the
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ones we've always thought of as the big
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three but there's by now a a very large
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number of uh you know not only factories
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but dealerships uh of not just Japanese
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but Korean German and the French may end
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up with some role here too by if they
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end up with some assets uh through their
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own negotiation with GM so uh you know
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will there be a thriving US Auto
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industry it'll be affected by the
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overall economic conditions the you know
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there was a prediction of 15 million
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vehicles per year as a kind of expected
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in a moderate recession uh GM was basing
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a lot of his estimates on 14 million the
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prediction for 09 is 13 million so
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that's a dramatic percentage reduction
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from what everyone was counting on how
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quickly will that come back how quickly
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will Auto Sales come back that's the
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kind of purchase that people do postpone
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when times are tough they can't postpone
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forever they may shift towards used cars
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and the like so how quickly sales come
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back is obviously a big thing that
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affects both the healthier and the less
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healthy part of the industry um whether
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they go under I I think there will be a
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lot that happens uh from the government
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as well as from these companies to
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prevent bankruptcy and uh and I'm still
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a little skeptical of of of the big
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mergers but I think there'll be lots and
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lots of moving around here before we see
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the final outcome the other thing here
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to mention even though we're focusing on
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the big companies uh the big us
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companies a lot of dealerships have been
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going out of business have been
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experiencing financial problems so if
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you look at the distribution Channel
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even if all of this they weather the
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storm as far as big companies and they
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have some merger activity or buying of
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assets you've got your distribution
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channel for at least General Motors and
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chryler being hurt and if you know it
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takes a little while to get that back to
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get if Toyota is is still going fairly
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strong and they have the dealership on
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the corner selling cars and the
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dealership across the street is closed
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down it's going to take a little bit to
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get people with money financing backing
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to get the distribution Channel back
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where it was so probably you know there
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will be an industry you're right the
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foreign companies are going to remain
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pretty strong but I think uh it's going
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to there's going to be a lot of problems
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for I have just one thought on the
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dealership issue um you might think that
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it's easier to close a dealership than
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it is to close a giant Factory but in
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fact the uh each state has franchise
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laws and there's a lot of protections
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against closing dealers and as the big
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three have shrunk they've had a great
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difficulty reducing their dealerships
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proportionate to their drop in sales
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which then means everyone's competing
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for the same smaller number of customers
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this kind of a crisis puts a lot of
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dealers out of business the bright side
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is a much more rational dealership
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structure for these companies however
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they emerge well thanks very much our
00:16:54
pleasure thank you thank
00:16:57
you for more information please visit
00:17:00
knowledge. won. up.edu
00:17:04
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